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Noah Zivitz

Managing Editor, BNN Bloomberg

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A veteran Canadian banking analyst isn't being fazed by some headline-grabbing challenges facing the sector and is nudging up profit estimates for next year.

In a report to clients Thursday, Darko Mihelic from RBC Capital Markets said fundamentals and "attractive" valuations underpin his positive outlook for the big lenders on his coverage list.

"While there are some known risks to our outlook including Omicron, inflation, and relatively high housing prices in Canada, we view these risks as surmountable," he said.

Mihelic said he expects loan growth, continued improvement in credit quality, and what he described as "fully loaded" capital levels to support his view on the stocks.

The looming prospect of higher interest rates is also contributing to his bullish view. Indeed, he's expecting net interest margins to stabilize in the first half of the banks' current fiscal year and rise in the second half of the year. Mihelic singled out Toronto-Dominion Bank as having the greatest sensitivity to higher interest rates in the United States.

For the banks he covers (all of the Big Six, excluding Royal Bank of Canada), Mihelic expects average core earnings per share growth of 5.3 per cent in the current fiscal year and 9.4 per cent in fiscal 2023. He nudged up his profit expectations for each of those five banks next year, other than Bank of Nova Scotia.